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Abusive Brokers Beware


Finance: ARBITRATION

ABUSIVE BROKERS BEWARE

Chalk one up for the little guy. With Clarence Thomas the only dissenter, on Mar. 6, the U.S. Supreme Court ruled 8-1 that brokerage firms cannot deny investors punitive damages in securities arbitration cases. "This is a landmark decision that's a real victory for investors," says David E. Robbins, a New York arbitration attorney.

Until now, the securities industry had found a roundabout way to impede arbitrators from awarding investors punitive damages. How? Through the agreement that the customer signs when an account is opened. Most agreements stipulate that in arbitration, the laws of New York State will prevail. Unbeknownst to most investors, in New York, the headquarters of the securities industry, state law prohibits arbitrators from awarding punitive damages. Now, the Supreme Court has ruled that because the customer agreements didn't clearly state that investors are giving up the right to punitive damages, they cannot be prevented from collecting such awards.

The Supreme Court ruled for Antonio Mastrobuono, a Chicago college professor, and his wife. They sued a broker with New York-based Shearson Lehman Hutton, now Smith Barney Inc., for making unauthorized trades. Two federal courts overturned an arbitration panel ruling that awarded the couple $400,000 in punitive damages. On appeal, the Supreme Court reversed the lower courts since Shearson hadn't made it clear that the Mastrobuonos were waiving their rights to punitive damages.

Investors can't expect to start wallowing in fat awards anytime soon, though. Investors currently win punitive damages in some 2% of securities-arbitration cases in jurisdictions other than New York State. Cases that warrant punitive damages are still rare because they must be egregious. "I wouldn't expect to see too much of an increase in punitive damages" just because of the Supreme Court ruling, says Richard Ryder, editor and publisher of Securities Arbitration Commentator.

OBLIQUE OUT. In response to the Supreme Court ruling, brokerage firms could revise the agreements to make it clear that arbitration awards will be limited to compensatory, not punitive, damages. But that would be difficult, since the New York Stock Exchange and the National Association of Securities Dealers have rules that say brokerage firms can't specifically limit relief in contracts, says Ryder, even though they have managed to do so up until now with the oblique agreements. "It's not as simple as rewriting agreements," says Theodore Levine, PaineWebber's general counsel.

The industry may get some help from the Republican Congress. Proposed legal-reform legislation limits punitive damages in the courts to $250,000 or three times compensatory damages. "The reform bills will effect the standards applied in future cases of this type" in arbitrations as well, says Alfred W. Cortese Jr., a partner at Pepper, Hamilton & Scheetz. In the meantime, score one for investors.By Leah Nathans Spiro in New York


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